Sterling gained in value versus the Canadian dollar on the interbank market this week, in part because a ‘No Deal’ Brexit now looks less likely, because the EU has extended the UK’s deadline.

However, looking to Canada, the so-called loonie dollar lost value, first because the Bank of Canada (BoC) signalled that it might soon cut interest rates. In addition, Canada’s economy expanded less than forecast in August, according to official statistics recently.

BoE sets path to negative rates as COVID-19 lockdowns beckon

BoC holds interest rates at 1.75% but signals future cut

Canada’s central bank held interest rates at 1.75% this week, as widely forecast by the world’s investors. However, in the BoC’s accompanying press conference, Governor Stephen Poloz signalled they might soon reduce borrowing costs.

This is because, first, Canada is one of the only countries not to cut interest rates, since the US/China trade war began to bite. This is encouraging the world’s money managers toward the Canadian dollar, to get higher returns, increasing the price of Canada’s exports.

BoC Governor Poloz wishes to avoid this, as fewer exports might slow Canada’s economy. So this week, Mr. Poloz said that “We are not an island”, preparing the market for a future interest rate cut.

Canada’s GDP expands by less than forecast in August

Another reason why the Canadian dollar lost value this week is that Canada’s GDP expanded by just 0.1% in August, said Statistics Canada (StatsCan) recently. This was below economists’ predictions for 0.2% growth, and only slightly above July’s 0.0% growth.

Canada’s economy grew over the Summer, because Canada’s manufacturing activity increased. Nonetheless, this data suggests that Canada’s GDP growth is close to standstill.

With this in mind, it’s little surprise that this week the BoC cut its economic growth forecasts for the country for 2020, down by 0.4% to 1.6%. If Canada’s economy disappoints in the coming weeks and months, this may further weaken the loonie dollar.

Canada’s trade balance, unemployment data due next week

Looking to next week, top-tier Canadian economic data includes September’s trade balance figures, as well as October’s unemployment rate, both of which may influence the value of the CAD.

In particular, it’s forecast that Canada’s unemployment rose by 0.2% in October, to 5.7%, which could point to weakness in the North American country’s until-recently sturdy job market.

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